The Standard & Poor’s 500 Index added 2.3 percent to 888.69 at 2:25 p.m. in New York. The Dow Jones Industrial Average gained 174.19 points, or 2 percent, to 8,738.72. The Russell 2000 Index of small U.S. companies increased 3.3 percent.

The Fed’s decision came after simultaneous recessions in the U.S., Europe and Japan dragged the S&P 500 (http://www.bloomberg.com/apps/quote?ticker=SPX%3AIND) down almost 45 percent from its 2007 record and sent benchmark indexes from Brazil to Bangkok into bear markets. Policy makers reduced the target rate for overnight lending between banks from 5.25 percent with nine previous cuts over the past 15 months.

Fed Chairman Ben S. Bernanke indicated in a Dec. 1 speech that policy makers will need to focus on “the second arrow in the Federal Reserve’s quiver -- the provision of liquidity,” including options such as purchasing Treasuries to inject more cash into the economy.

The S&P 500 is poised for its worst year since the Great Depression after losses and writedowns at the biggest global financial companies reached almost $1 trillion and earnings at U.S. companies dropped for five straight quarters, matching the longest streak on record.

“There’s enough panic and fear out there that the market, as always forward-looking, has largely discounted what’s going to happen,” Whitney Tilson (http://search.bloomberg.com/search?q=Whitney+Tilson&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), co-founder of T2 Partners LLC, told Bloomberg Television. “The views I’m expressing here are actually fairly widely held among investors.”
The S&P 500 has climbed more than 26 percent since slumping to an 11-year low on Nov. 20, gains that short seller Jim Chanos said will falter as President-elect Barack Obama’s infrastructure spending plan disappoints investors. Chanos said he’s adding to bets against construction, cement and steel companies.

“It will not be profitable to the extent that people think,” Chanos, whose Ursus Fund has risen more than 50 percent this year, told Bloomberg Television. “People are forgetting that there are always promises of infrastructure plans.”

More than three-quarters of money managers expect U.S. stocks to advance next year, while 72 percent say the market is undervalued, according to Russell Investments’ quarterly survey of investors.
To contact the reporter on this story: Whitney Kisling (http://search.bloomberg.com/search?q=Whitney+Kisling&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) in New York at [email protected] ([email protected]).

Fed Cuts Rate to Between Zero-0.25%, Ready to Use All Tools
By Scott Lanman and Craig Torres

Dec. 16 (Bloomberg) -- The Federal Reserve cut the main U.S. interest rate to “a target range” of between zero and 0.25 percent and said it will do whatever is necessary to ease the longest recession in a quarter-century.

“The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability,” the Federal Open Market Committee said today in a statement in Washington. “The committee anticipates that weak economic conditions are likely to warrant exceptionally low levels of the federal funds rate for some time.”

Nine rate cuts in the past 14 months and $1.4-trillion in emergency lending have failed to reverse the economic downturn. Chairman Ben S. Bernanke (http://search.bloomberg.com/search?q=Ben+S.+Bernanke&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said this month the central bank could expand its toolkit and try to unfreeze credit by buying Treasury securities and other assets.

“The focus of the committee’s policy going forward will be to support the functioning of financial markets and stimulate the economy through open market operations and other measures that sustain the size of the Federal Reserve’s balance sheet at a high level,” the FOMC said.

The statement noted that the Fed has already announced it will purchase “large quantities” of agency debt and mortgage- backed securities, and said the Fed stands “ready to expand” these purchases “as conditions warrant.” The central bank continues to weigh “the potential benefits of purchasing longer-term Treasury securities.”

“The Federal Reserve will continue to consider ways of using its balance sheet to further support credit markets and economic activity,” the statement said.

Discount Rate

The deepening economic slump pushed unemployment to 6.7 percent last month, the highest level since 1993, while builders broke ground on the fewest new homes since record-keeping began in 1947. Deflation is also emerging as a risk: consumer prices fell the most on record in November, the Labor Department said earlier today.

The vote was unanimous. In a related move, the Fed lowered the rate on direct loans to banks and securities dealers to 0.5 percent.
The Fed twice pared the federal funds rate, or overnight lending rate, to 1 percent since adopting it as the main tool of monetary policy in the late 1980s. The 1 percent rate held from June 2003 to June 2004. The Fed staged a half-point reduction to 1 percent on Oct. 29.

The Bank of Japan has been the only major central bank in modern times to mix a policy of steep rate reductions with quantitative easing, or the strategy of injecting more reserves into the banking system than needed to keep the target interest rate at zero.

Extra Cash

Japan’s central bank (http://www.bloomberg.com/apps/quote?ticker=BOJDTR%3AIND) kept its main rate at zero from 2001 to 2006 while flooding the banking system with extra cash to encourage lending, spur growth and overcome deflation. The abundant funds failed to prompt lending by commercial banks, which expanded their reserves at the central bank almost nine times by early 2004.

Bernanke, acting with New York Fed President Timothy Geithner (http://search.bloomberg.com/search?q=Timothy%0AGeithner&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1), has set up emergency loan programs aimed at averting a collapse of the nation’s credit markets. Geithner is President- elect Barack Obama (http://search.bloomberg.com/search?q=Barack+Obama&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1)’s pick for Treasury secretary and didn’t attend today’s meeting.

The Fed has enlarged bank reserves, supported issuance of commercial paper and provided liquidity to government bond dealers. It is also swapping dollars with the European Central Bank and its other counterparts to supply banks in other countries.

Swelled Balance Sheet

The moves have swelled the Fed’s balance sheet to $2.26 trillion from $868 billion in July 2007. That’s in addition to the $700 billion Troubled Asset Relief Program, which the U.S. Treasury has used since October to channel about $335 billion of capital injections into banks and other financial companies.

Still, the economy has crumbled, with employers cutting 533,000 jobs from payrolls in November for a total loss this year of 1.9 million, which more than erases the 2007 gain of 1.1 million.

Credit remains scarce in many markets and major financial institutions worldwide continue to report losses and writedowns totaling $994 billion.
Macroeconomic Advisers LLC, a St. Louis-based consultant, says the economy is probably shrinking at a 6.5 percent annual pace this quarter, which would be the biggest drop since 1980.

The firm forecasts a 4.2 percent annual contraction rate in the first quarter, returning to no growth in the second quarter and a 2.3 percent expansion rate in the second half of 2009.

‘Very Weak’

“The economy is very weak,” former Richmond Fed President Al Broaddus (http://search.bloomberg.com/search?q=Al+Broaddus&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said in an interview with Bloomberg Television before the decision. Fed officials are trying to do “whatever they can to help the economy find a bottom and begin at some point in the not-too-distant future to move out of this,” Broaddus said.

Early this month, as a panel of leading U.S. economists declared the recession began in December 2007, Bernanke signaled he was ready to dig deeper into the central bank’s toolkit. He said he may use less conventional policies, such as buying Treasury securities, because his room to lower the main U.S. rate from the current 1 percent level was “obviously limited.”

Obama said at a press conference today that he won’t “second-guess” the Fed, adding that with “traditional ammunition” running low, “it is critical that the other branches of government step up.” Obama has called for a stimulus package including spending to rebuild U.S. roads, bridges and other infrastructure.

Lower Rates

The federal funds target rate has weakened as a monetary policy tool because the Fed’s flood of funds has caused the average daily rate to trade below the policy goal every day since Oct. 10.

The gap between the target (http://www.bloomberg.com/apps/quote?ticker=FDTR%3AIND) and the effective rate, or average daily market rate, has averaged about a half point since Sept. 12. The gap averaged just above zero from the start of this year through Sept. 2.
The central bank is trying to lower mortgage rates by purchasing up to $100 billion of debt issued by housing-finance providers Fannie Mae and Freddie Mac and $500 billion of mortgage-backed securities guaranteed by the companies.

The Fed’s counterparts around the world have staged their own interest-rate cuts. The ECB has lowered its main rate to 2.5 percent this month from 4.25 percent in July, while the Bank of England reduced its rate to 2 percent this month from 5.75 percent in July.

ECB President Jean-Claude Trichet (http://search.bloomberg.com/search?q=Jean-Claude+Trichet&site=wnews&client=wnews&proxystylesheet=wnews&output=xml_no_dtd&ie=UTF-8&oe=UTF-8&filter=p&getfields=wnnis&sort=date:D:S:d1) said yesterday there’s a limit to how far the bank can cut interest rates and signaled policy makers may pause in January. “Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes,” Trichet told journalists in Frankfurt.

While the Fed can’t push interest rates below zero, “the second arrow in the Federal Reserve’s quiver -- the provision of liquidity -- remains effective,” Bernanke said in a Dec. 1 speech.